Governor Brown unbalanced in China

April 10, 2013

Californian Governor Jerry Brown had the engagement rules straight for his followers: offer your business card with two hands; clap along if others clap; do not present clocks or knives; arrival gifts for your friends and clients are welcome. And, as Brown said upon arriving in Beijing on Tuesday, in his first trip to China since 1986, ”California is a green state and loves greenbacks”, which are now mostly in Beijing’s coffers, the governor hinted.

All due credit to Governor Brown for coming to the same conclusion that the famous bank robber Willie Sutton did decades ago. When asked why he robbed banks, he said ”that is where the money is”.

But however on target he was about the destination and however right he might be about the etiquette, he is missing the bigger picture. That is because Governor Brown has no strategy to offer the Chinese about his State of California.

It starts with transparency. To go over to China hat in hand without presenting as much as a balance sheet for the his state is, to put it politely, presumptuous. He would not get to first base with a second-tier venture capital firm in this country without one, so why should he assume it would be different with the second-largest sovereign power in the world?

Chinese capital may in fact be more patient than most, and they do face a specific dilemma: how to convert soft dollar assets such as treasury bills into hard dollar assets such as infrastructure to inoculate themselves against future inflation.

But this is not naive capital, and it will never arrive in the volumes it could without some sense that there is a long-term plan to cure the fiscal crisis in California. Today, if the Chinese give cash it will end up in a bottomless pit, with little benefit to either China or the US beyond transitory political optics.

What should California do about its gigantic debt? Brown has offered no idea. He is still impaled on the horns of the same old dilemma: increase taxes or reduce services.

But construct an accurate assessment of the state’s assets and one could inject billion of dollars of private capital into public assets to create new value and kick-start the economy, avoiding the self-defeating cycle of more taxes and fewer services.

Once you have a strategic plan, capital rich China can play a role by contributing to the financing of necessary projects. This can create new jobs in America without any fear that these jobs or any technology will be taken away. American and Chinese interests would be bonded closer together, which could also help America to have a bigger de facto say in China. In this scenario, Chinese greenbacks would make California greener.

There is a grand bargain to be made between China and the US, and surely California, could take the lead. Instead a clumsy, piecemeal approach – invest here, buy there, but without a long-term strategy for development in California – is destined to be a failure for both California and for China.

In fact, if California has no strategy, then whatever the Chinese do is bound to be viewed negatively by the public. If China does invest, it plays into the all too frequent fears of foreign control of our future; if they don’t come, then they can be viewed as insensitive for failing to help California in a moment of need.

There is an alternative: a coherent and carefully constructed plan that would offer the benefits of an influx of capital while still preserving the state’s control of its destiny.

Governor Brown has put himself and China in a comfort zone where all outcomes are bound to be failures. He is in a cozy lose-lose situation for himself, his state and China.

China needs to invest in California-based industries California, the world’s sixth largest economy, is experiencing the most serious fiscal crisis in its history. Bill Mundell dialogued with NetEase (a leading China-based Internet technology company) and said he...